Gross Domestic Product

What does GDP measure and why do we use it?

A measurement of a nation's income used to judge the economy of countries

What must = what?

income = expenditure

GDP Measures?

- total amount of income for a household

- total spending for a household

- total amount of income for a firm

- total amount of spending for a firm

What can GDP be calculated with?

Income or expenditure. The US uses expenditure, but they should be aprroximately equal.

GDP

The market value of all final goods and services produced within a country in a given period of time.

Components of GDP

- consumption

- investment

- government purchases

- net exports

Consumption

Spending by households on goods and services (excludes purchase of new housing)

(durable goods last > three years and nondurable goods last < three years)

Investment

Purchase of capital goods that will be used to produce more goods and services

- buildings and structures

- rent and owned homes

- inventory

Government Purchases

Spending by local, state, and federal government

- salaries for teachers

- military personnel

Net Exports

Foreign purchases of domestically produced goods- the domestic purchases of foreign goods

Nominal GDP

Uses current prices

(price x quantity) + (price x quantity)

Real GDP

Holds prices, only affected by change in quantity

(base year price x quantity) + (base year price x quantity)

GDP Deflator

Nominal GDP/Real GDP

Inflation using GDP Deflator

((Deflator new - deflator old) / (Deflator old)) x 100